How to Restore Credit After Foreclosure

by HomeLoan.com

If you've had the unfortunate experience of having a house foreclosed upon, it may feel like it's the end of your financial world, but it's not. You can restore credit after foreclosure. As long as you evaluate your spending habits to see why your home ended up in foreclosure and understand what creditors are looking for when it comes to credit repair, you can restore your credit. You will need to come up with a viable plan and stick with it to watch your credit rating improve.

Step 1

Reduce your outstanding credit balances. A foreclosure has a major negative impact on your credit. To begin the restoration process, lower your outstanding credit balances. Creditors look at your debt ratio, which is the amount of outstanding credit vs. the total amount of credit you have available to you. A debt ratio of 50 percent or above is a red flag and a signal of financial instability. To improve your credit score and restore your credit, aim for a debt ratio of 35 percent or less.

Step 2

Pay your bills on time. Your bill-payment history has a large impact on your credit rating. After a foreclosure, you will have to start from scratch rebuilding a record of timely payments. As much as 35 percent of your credit score is based on your bill-payment history, therefore it is important to pay everything on time after a foreclosure.

Step 3

Increase your income. A part of your credit rating is based on your debt to income ratio. It is calculated by dividing your monthly debts by your monthly income. The lower your debt to income ratio, the better. Similar to the debt ratio, aim for a debt to income ratio of 35 percent or less. Increasing your income in conjunction with reducing your monthly payments will improve your debt to income ratio.

Step 4

Apply for new credit slowly. If you're trying to reestablish a credit profile after a foreclosure, refrain from applying for several credit cards in a short period of time. A sudden flurry of activity is frowned upon by creditors. Stagger your credit applications. Wait anywhere from 30 to 60 days between requests for new credit.

Step 5

Monitor your credit annually. Go to annualcreditreport.com to get a free copy of your credit report. They will provide you with credit reports from the three major credit reporting agencies, Equifax, Experian and TransUnion. As you make changes in your spending and bill payment habits, you can see how your choices affect your credit rating.